Part 3: Defense Equipment to Be Recognized as "Investment" Not as "Consumption"

Research and development (R&D) expenditures are not alone in being affected by the redrawing of the boundary of capital in the forthcoming benchmark revision of the Japanese System of National Accounts (JSNA). The government can be defined as the producer of defense services. Expenditures on defense equipment and systems, except for those that can be readily put to civilian use, have been treated as consumption by the government (through intermediate inputs), but will be redefined as gross fixed capital formation.

This means an increase in the capital inputs in the production of defense services. Since government services are not traded on the market, the amount of services produced by the government is defined by the total amount of inputs involved. The amount of government services produced, all of which are to be purchased (consumed) by the country, will rise with the use of defense equipment and systems, i.e., an increase in the consumption of fixed capital (CFC). Accordingly, the revision of the JSNA will increase Japan's nominal gross domestic product (GDP) by about 0.1%. This is a modest impact, roughly one-fifth of that observed in the United States when it made a similar revision.

Some may question the notion of treating weapons as a capital asset because they are not necessarily put into actual use. However, the same can be said about corporate capital investments for enhancing production capabilities, as the newly built capital assets being put into use depends upon how the business environment turns out. Defense equipment and systems can be seen as contributing to the production of broadly defined defense services including deterrence capabilities. Assets as defined in the 2008 SNA include not only those that generate benefits in the form of direct use but also those that do so in the form of potential services.

The stock of R&D can be defined in a similar manner. Indeed, R&D activities often end unsuccessfully. One possible way to estimate the value of the stock of R&D is by measuring the success rate of R&D activities for each business, which are regarded as a success when they culminate in the acquisition of a patent. However, truly important R&D achievements may be kept secret because filing a patent application inevitably involves the disclosure of detailed information on the invention. Also, temporary failure in the process of R&D can be seen as an increase in knowledge that helps lay the groundwork for future success. The stock of R&D as defined in the 2008 SNA includes such broadly-defined knowledge.

With the forthcoming revision of the JSNA, the scope of expenditures included in ownership transfer costs (OTC) for assets will be expanded. Up until now, only part of the OTC incurred for the transfer of the ownership in an asset has been included in the acquisition cost for the asset. Following the revision, commissions paid to a real estate agent in purchasing a house or land will be included in the OTC, resulting in a 0.2% increase in Japan's nominal GDP. This will enable a more accurate comparison between Japan and other countries in GDP, investment ratio, and so forth.

Research Institute of Economy, Trade and Industry, IAA (JCN 6010005005426)JCN: Japan Corporate Number

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